T.C. Memo. 1998-341

UNITED STATES TAX COURT

CANE CREEK SPORTSMAN'S CLUB, INC., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16726-96. Filed September 24, 1998.

James F. Hooper and Paul R. Chamblee (officers), for 

petitioner.

Marshall R. Jones and Shuford A. Tucker, Jr., for 

respondent.

MEMORANDUM OPINION

FAY, Judge: Respondent determined a deficiency in

petitioner's Federal income tax for 1993 in the amount of

$23,327.
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All section references are to the Internal Revenue Code in

effect for the taxable year in issue, and all Rule references are

to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.

Petitioner seeks to have its separate existence disregarded

and its realized gain on the 1993 sale of certain improved land

treated as income taxable to a partnership, because its

incorporators believed that they had created a partnership, not a

corporation. No issue has been raised as to respondent's

determinations that petitioner's basis in the property was

$56,697 and that the sale resulted in a taxable gain in the

amount of $112,053.

Some of the facts have been stipulated by the parties and

are so found. The stipulation of facts filed by the parties and

the accompanying exhibits are incorporated herein by this

reference. 

Background

Petitioner was incorporated under the laws of the State of

Alabama on January 20, 1971. The corporate charter contained a

broad statement of purposes, including: To acquire lands; to

improve, develop, and manage real estate; to hold stock; to

borrow or lend money; and to mortgage, sell, lease, or otherwise

dispose of any lands. The charter also states that petitioner's

duration was perpetual.
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At the time of incorporation, petitioner's total authorized

stock was worth $1,200, divided into 12 shares of common stock

with a par value of $100 per share. Originally, six shareholders

owned stock in petitioner, including James F. Hooper (Hooper) and

Paul R. Chamblee (Chamblee). Each of the six original shareholders owned two shares of common stock. Under petitioner's

bylaws, a shareholder could transfer his interest to an outsider

only after having offered such shares to petitioner at market

value. In 1974, one shareholder sold his stock to the remaining

five shareholders. One year later, another shareholder sold his

stock to the remaining four. Finally, in 1982, two more

shareholders sold their stock to Hooper and Chamblee, leaving

each a 50-percent owner of petitioner.

Pursuant to its bylaws, petitioner's business and property

would be managed by a board of directors, elected by the

shareholders. The board, in turn, would delegate managerial

duties to corporate officers by electing a president, vice

president, and secretary-treasurer. The officers' main function

would be to oversee the corporation's daily affairs, including

authorizing written contracts of the corporation, signing all

stock certificates, keeping minutes of all proceedings, and

safeguarding the corporation's moneys. Both Hooper and Chamblee

have served on petitioner's board of directors since 1971. 

During 1993, Hooper also acted as president and, together with
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Chamblee, executed the petition in this case on the corporation's

behalf.

At the time of its incorporation, petitioner acquired 

approximately 450 acres of land, improved with a cabin. The

shareholders used the cabin as a private hunting lodge during the

years 1971 through 1993. On January 30, 1971, 10 days after

incorporation, the six original shareholders signed an agreement

stating that the property would be used by the six "original and

sole owners and partners" of the hunting club and their immediate

families as a recreational facility only. The agreement also

states that none of the six will make or produce a product nor

sell his shares or hunting rights to outsiders, and, if at any

time one of the "six partners" wishes to withdraw from the

"partnership," he must sell his shares to the other partners

only.

Petitioner secured an employer identification number and

filed corporate Federal income tax returns on Form 1120 for 1980

through 1993. On its Federal income tax returns, petitioner

depreciated the cabin and reported net income for the years 1980

through 1986, and 1990. Chamblee never reported any share of

petitioner's net income on his personal Federal income tax

returns.

On February 5, 1993, petitioner sold the property to

Champion International Corporation (Champion) for $168,750. On

September 7, 1993, petitioner was dissolved. That same year, its
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last annual report was filed with Alabama's secretary of state's

office. The sale, in 1993, was reported on petitioner's Federal

income tax return, showing no gain because petitioner reported

both the sales price and adjusted basis of the property as

$33,730. During its life, petitioner did not rent or lease the

property to others. It did not keep books, maintain a bank

account, or hold regular meetings. Using personal checks and

cash, petitioner's shareholders covered the expenditures for

repairs and improvements made on the property.

Respondent determined in the notice of deficiency that

petitioner must include the gain of $112,053 from the sale of the

property in its 1993 income but that it was entitled to deduct an

unused loss carryover from 1992 of $9,290.

Discussion

Respondent's determination that petitioner must report its

realized gain on the 1993 sale of property is presumed to be

correct, and petitioner has the burden of proving otherwise. 

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 114 (1933).

Hooper and Chamblee, as officers of petitioner, argue that

they did not intend to incorporate petitioner and did not know,

until 1995, that a lawyer friend had, in fact, incorporated it.

They contend that petitioner was not a business venture, and its

corporate existence should therefore be disregarded.

State law determines whether a corporation has been

organized. See Stoody v. Commissioner, 66 T.C. 710, 716 (1976);
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1The cited Federal tax regulation makes clear that it defers

to local law to determine the rights and obligations that members

of an organization have among themselves and with third parties.

Skarda v. Commissioner, 27 T.C. 137, 144 (1956), affd. 250 F.2d

429 (10th Cir. 1957); sec. 301.7701-1(c), Proced. & Admin. Regs.1

Federal law, on the other hand, determines how the entity is to

be taxed. See Burk-Waggoner Oil Association v. Hopkins, 269 U.S.

110 (1925); Carver v. United States, 188 Ct. Cl. 202, 412 F.2d

233 (1969); Stoody v. Commissioner, supra at 716-717; sec.

301.7701-1(c), Proced. & Admin. Regs.

Under Alabama law, a corporation exists when the articles of

incorporation are filed. Ala. Code sec. 10-2B-2.03(a) (1975). 

Petitioner's certificate of incorporation was filed with the

proper authorities in Alabama on January 20, 1971; thus, petitioner began to exist on that date as a separate body authorized

to do business in Alabama.

Although the State of Alabama has conferred the label of

"corporation" on petitioner, that does not, per se, control its

status for Federal tax purposes. See section 301.7701-1(c),

Proced. & Admin. Regs., which holds open the possibility that a

State-chartered corporation could also be classified a trust for

Federal tax purposes.

Section 7701(a)(3) defines the term "corporation" to include

"associations, joint-stock companies, and insurance companies." 

Oftentimes, definitional problems arise where an entity without a
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2We offer no opinion as to whether the first part of the

test under Moline Properties, Inc. v. Commissioner, 319 U.S. 436

(1943), is also satisfied.

State corporate charter possesses the attributes of a corporation

so as to be treated as one for Federal tax purposes. In this

case, however, we have before us an incorporated entity wishing

to disavow that form.

We shall not disregard a corporation for Federal tax

purposes if either (1) the corporation was formed for business

purposes, or (2) its creation is followed by the carrying on of

business activity. See Moline Properties, Inc. v. Commissioner,

319 U.S. 436 (1943). Petitioner's tax existence under Federal

law is established if either test is satisfied. See Carver v.

United States, supra at 236. Rarely is a corporation's tax

identity ignored, unless it is a sham. See Bennett Paper Corp.

v. Commissioner, 699 F.2d 450, 452 (8th Cir. 1983), affg. 78 T.C.

458 (1982); Strong v. Commissioner, 66 T.C. 12, 22 (1976), affd.

without published opinion 553 F.2d 94 (2d Cir. 1977).

Hooper and Chamblee argue that petitioner conducted no

business activity--that it merely held naked record title to the

property and therefore it "never [was] a business venture". We

disagree and find, under the second part of the Moline

Properties, Inc. test, that petitioner actually engaged in

business.2
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3The record, however, contains no evidence as to the source

of that income.

Only a minimal amount of business activity is required to

meet the second prong of the Moline Properties, Inc. test. See

Britt v. United States, 431 F.2d 227, 237 (5th Cir. 1970);

Tomlinson v. Miles, 316 F.2d 710, 714 (5th Cir. 1963). We

believe that the formation of petitioner was followed by business

activity in the ordinary meaning. See National Investors Corp.

v. Hoey, 144 F.2d 466, 468 (2d Cir. 1944). Petitioner's activity

began with the adoption of bylaws, the election of officers and

directors, and the issuance of stock. It included petitioner's

buying and selling the property in question, securing an employer

identification number, filing corporate Federal income tax

returns, taking depreciation deductions on the hunting lodge, and

reporting net income. Indeed, for most of the years in which

petitioner filed Federal income tax returns, it reported having

income.3 Under these circumstances, we find that petitioner was

active enough to justify holding that it did engage in business. 

The absence of books and a bank account, and the failure to hold

corporate meetings are not decisive on that question. See Paymer

v. Commissioner, 150 F.2d 334, 336 (2d Cir. 1945), affg. in part

and revg. in part a Memorandum Opinion of this Court dated Jan.

2, 1943. The decision to recognize or not to recognize the tax

identity of a corporation depends upon what the corporation does,
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not what it is called, how many or how few own it, or how they

regard it. Carver v. United States, supra at 237.

Hooper and Chamblee, among others, created petitioner for

their joint advantage. Real and substantial benefits inured to

petitioner's shareholders, including the privilege of limited

liability, the opportunity to continue petitioner's existence in

the event of a shareholder's death or withdrawal, the ability of

petitioner to hold title to and sell property, and the ability of

each individual shareholder to transfer his ownership interest in

petitioner.

Under the Internal Revenue Code, taxpayers are free to

arrange their affairs as they choose; however, having made that

choice, they must accept the resulting tax consequences, whether

fully contemplated or not. See Commissioner v. National Alfalfa

Dehydrating & Milling Co., 417 U.S. 134, 149 (1974). Because

taxpayers may select the form in which they do business, the

choice of entity is generally binding. Crouch v. United States,

692 F.2d 97, 99 (10th Cir. 1982); see also Bradley v. United

States, 730 F.2d 718, 720 (11th Cir. 1984). Whatever the purpose

may have been in choosing to incorporate petitioner, so long as

that purpose is the equivalent of business activity or is

followed by the corporation's carrying on business, the

corporation remains a separate taxable entity. See Moline

Properties Inc. v. Commissioner, supra at 438-439. We hold that
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the shareholders did in fact use petitioner to such an extent

that its separate identity must be recognized.

We sustain respondent's determination in the notice of

deficiency that the sale of the property, in 1993, resulted in a

taxable gain to petitioner in the amount of $112,053 and that

petitioner is entitled to a net operating loss carryover from

1992 in the amount of $9,290. To reflect the foregoing,

Decision will be entered for

respondent.